Glass Steagall II Won't Prevent Another Crisis

Reform: A bipartisan group of senators wants to break up America's banks, based on the notion that big banks are bad and that the "repeal" of Glass-Steagall in 1999 led to the 2007 financial crisis. Wrong on both counts.

aclgsThe idea that fat, greedy, much-too-powerful banks on Wall Street caused the financial crisis has become an almost indelible part of the public debate. Too bad it isn't true.

That hasn't stopped far-left Democratic Sen. Elizabeth Warren, squishy GOP Sen. John McCain and a few inept others from seeking to re-regulate banks under the 1933 Glass-Steagall Act, the landmark New Deal law that separated commercial and investment banking but did nothing to end the Great Depression.

"The four biggest banks are now 30% larger than they were just five years ago, and they have continued to engage in dangerous, high-risk practices that could once again put our economy at risk," according to Warren.

Thirty percent larger? Gee, the Fed is printing $85 billion a month, most of which gets immediately deposited into the U.S. banking system. You wonder how the banks got so big? They're on Fed steroids.

We're told also that because of the risks of "too-big-to-fail," we must split up big banks. But why? Why not just stop bailing out banks — no matter what their size? That would discourage banks from getting bigger, without putting potentially hundreds of billions or even trillions of dollars of taxpayer money at risk.

As for "dangerous, high-risk practices," the unsafe practices that banks undertake are a result of government regulations, not market forces or greed.

Take the explosion in mortgage lending from 1996 to 2006 and the securitization of mortgage debt that enabled it. Each was due to Clinton-era changes to the Community Reinvestment Act that required banks to ignore credit histories and other relevant credit-quality data in order to make more loans to minorities.

Banks could be forbidden from merging or have expansion plans curtailed by bureaucrats if they refused to comply. This is a fact now conveniently forgotten.

As for the supposed "repeal" of Glass-Steagall in 1999, it didn't happen. As American Enterprise Institute Fellow and bank analyst Peter J. Wallison has noted, Glass-Steagall still forbids commercial banks from underwriting or dealing in securities. It wasn't repealed at all.

The only change made in 1999 was to the part of the law that kept U.S.-insured banks from affiliating with investment banks that underwrite and sell securities.

Nor did changes in Glass-Steagall cause the financial crisis. During the meltdown, banks didn't use insured deposits for risky securities trading. It's another myth.

Fact is, banks have always been able to buy and hold — but not trade — mortgage-backed securities. They got into hot water only after the government encouraged them to buy huge amounts of securities backed by subprime and low-quality mortgages. Again, government regulation run amok — not Wall Street.

Neither Warren nor McCain nor others who push Glass-Steagall II get this. Even after trashing trillions of dollars in Americans' wealth, they have the nerve to call their clumsy meddling in financial markets "reform."

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